From : Do you want to build a stock, man? (Angie Andriani, Liting Ruan, Adreana Song) Subject : Stock Case Write Up
Summary Our selected portfolio has earned a return of 0.34% overall. Fortunately, the end value is not less than our initial investment. However, we still fall behind compared to other market funds. In this memo, we will illustrate the events that have affected our portfolios performance followed by a detailed analysis, and the lessons we have learned.
Firm-Specific Events For the first six weeks since we invested in our portfolio, we had been pessimistic about our portfolio value that kept fluctuating in a troubling pace. Here are some market or firm specific events that we believe have affected our portfolio performance: Google (GOOG) In the evening of May 20th, Google was named the world's most valuable brand according to research firm Millward Brown's "2014 BrandZ Top 100" ranking. Since then, their stock price per share has increased by 6.8%. Prior to the news, Google stock had been steadily decreasing. Amazon (AMZN) The stock price of Amazon has been decreasing continuously in general. The factor that might have contributed to the decrease is their failure to gain public praise on their new product, Fire TV. Other major changes that are worth noting occurred on May 20th and May 27th. On May 20th, their stock price decreased significantly because of their decision to remove Hachettes books from Amazons shelf. On May 27th, their closing price increased by 3.2% after they have defended themselves against the criticism regarding their decision to remove Hachette's books largely. Disney (DIS) Disneys stock has been steadily increasing during the past seven weeks. The stock has experienced a major increase of 3.04% for the week beginning April 29th. During that week, Disney released a Q2 earning of $1.92 billion which is 0.41 billion higher than the same period last year. People believe that this boost was related to the continued strength of the blockbuster film Frozen. Other than that, their stock price noticeably increased following the announcement about the cast arrangement for the upcoming Star Wars movie on April 29th. People got excited about the beloved original cast back on the screen. Moreover, the Disney Resort which is under construction in Shanghai took another big step ahead. The company has decided to invest more to speed up the expansion. The new resort is expected to welcome an increasing number of tourists on 2015. Coca Cola (KO) Coca Colas quarterly report was released on April 15th. Its shares rose 3.7% to $40.18 as the figures looked promising. On May 13th, Coca Cola purchased 16.7 million Keurig Green Mountain shares and increased its stake in the latter company to 16%. This raised speculation that Coca Cola would take over Keurig Green Mountain in order to diversify its products as soft drinks sales decline. The market seemed to be excited about this news, resulting in increase in Coca Cola stock price by 1% on the same day. Portfolio Performance Comparison to the Equity Market Compared to VFINX, QQQ, and VHGEX, our portfolio has the highest standard deviation yet the lowest average return. This tells us that that our portfolio is way more volatile and risky than the three funds. We believe that the high standard deviation is due to the fact that we invest 74.4% of our portfolio in two big technology companies, Amazon and Google, which has the correlation coefficient of 0.53. Unfortunately, Amazon has not been doing well for the past two months, leading to a significant loss in our investment. On the other hand, despite the continuous declination earlier, Googles stock price has gone up beyond our initial buying price on the last closing day. This shows how these two stocks affect our portfolio considerably given their high volatility. At the end of the day, the increase in Google, Disney, and Coca Cola was cancelled out by the drop in Amazons stock price. We believe that our inferior performance is largely due to the lack of diversification in our portfolio. Risk and Volatility There are quite a number of factors that affect the stock market in general, such as government policies, economic climate, and geopolitical issues. The Federal Reserves quantitative easing seems to have resulted in lingering nervousness and volatility in the US equity market until today (http://www.theguardian.com/business/2014/apr/10/tech-stocks-drop-markets-worry-fed- stimulus). However, if we look at individual stock performance, every step a company takes could impact its stock price. The firm-specific events we discussed above show how quickly the stock price made response to the strategies a firm took. Market expectations and evaluations are also big influences. Googles newly earned reputation as the worlds most valuable brand and the markets lack of excitement about Amazons new Fire TV prove the impact of market evaluations by itself. But in the end, a firms stock price would reflect the companys performance. The release of earnings reports, in our case Coca Colas, obviously influenced the companys stock value. Stock prices are established based on the expectations for the future earnings power of a firm. As investors get to see the reality of their expectations through earnings reports, stock prices adjust to this reality.
Lessons Learned Dont put your eggs in the same basket; it is better to invest in funds than picking out your own investment if you dont know have enough knowledge in it. An investor should follow the news on the company he/she has invested in; those information often--if not always--reflect the price of the stock.